The delicate balance of getting a big crypto airdrop right

Imagine giving out millions of dollars in free money and being seen as the villain.

That’s one of the biggest challenges facing crypto projects right now as they seek to decentralize and hand over governance of the project to early adopters.

But it wasn’t always an issue. 

In the beginning, the first projects that airdropped governance tokens to their early adopters were very successful. It was completely unexpected and those that used the protocol were ecstatic to receive what were — in some cases — tokens that could be sold for very large sums of money. This worked because it rewarded those who used the project, people who were typically knowledgeable of it and potentially fans of using it. It was a way to hone in on the project’s community and give users a say in decision-making.

The Compound airdrop was the first such airdrop on a big scale.

In June 2020, the DeFi lending project’s original stakeholders voted to distribute its tokens on a daily basis to those who continue to use the Compound protocol for the next four years. The tokens were governance tokens, which can be used to propose, vote and implement changes to the protocol.

This was shortly followed by the decentralized exchange Uniswap, in September 2020. It created a billion governance tokens and airdropped 15% of them to its community, with the rest going to a community treasury, team members, investors and advisors. Each cryptocurrency address that had used the Uniswap protocol could claim 400 UNI tokens, worth $2,000 at the time of the airdrop and around $9,600 today.

These airdrops were largely received well by their respective — and overlapping — communities. 

Gaming the system

The Compound and Uniswap airdrops marked the beginning of “Airdrop Season," during which more projects in the cryptocurrency space have followed suit by handing over control of their projects to their communities. And in the process, they would potentially make their early users rich.

Unsurprisingly, the lure of these potential airdrops inspired many crypto users to game the system in an attempt to increase their chances of getting tokens. 

The most high-profile example of this came last month when VC firm Divergence Ventures used multiple wallets to engage with the Ribbon Finance protocol in the hope that it would have an airdrop and the VC firm would profit from it. Divergence was also an investor in the project.

Between April 28 and May 11, the firm put $2.3 million into the protocol. On May 17, the firm received an investor note that an airdrop would come in the next few weeks, and on the same day, it added a further $1 million to the protocol — although it also claimed it had access to no insider information.

“First, we farm EVERYTHING with the starting assumption that every project will do a retro airdrop. Because practically every one does,” the firm said, after it was found to have earned $3.2 million via the airdrop. The firm has since returned the money.

Beyond this, it’s common knowledge that many individual investors are trying to make themselves eligible for future airdrops too. Crypto enthusiast Jean Brasse even maintains a public spreadsheet of potential airdrops (largely guesswork based on previous airdrops and public information) and how a user might become eligible.

Yet this has created a tricky dilemma. Many projects want to continue to decentralize and issue governance tokens but they want to only reward loyal users.

Adapting the airdrop model 

With the knowledge that many people are trying to game airdrops in advance, projects looking to issue governance tokens are now having to get creative to make their airdrops effective. But it’s a tricky balance to strike, and the risk is that it can leave loyal users dissatisfied.

The Ethereum Name Service (ENS), which airdropped its governance token on November 9, made two key choices to try to restrict the airdrop to its main users. It chose to apply the airdrop to wallets that owned ENS names rather than per name — so one wallet with 1,000 names would get just one portion of tokens. This was designed to prevent name squatters.

It also doubled the number of tokens handed out if the user had set their Primary ENS Name. This is the process where a wallet is linked to an ENS name in order to make it easier to send funds to that account. This was a key sign that somebody was actively using their ENS name and not just hoarding it.

Shortly after the airdrop was announced, Twitter sleuths noticed a cluster of accounts that appeared to have been purchasing many ENS names with the sole purpose of getting included in the airdrop many times over — a process often called “ airdrop farming.” The ENS team decided to blacklist these accounts.

“When it came to [dealing] with farmers we had a few principles: keep the airdrop as inclusive as possible while limiting farmers. So rather than instituting rules that would have excluded many legitimate users along with farmers, we decided to simply blacklist accounts that were obviously farming,” said Brantly Millegan, director of operations at the ENS.

Case in point: The Paraswap airdrop

The Paraswap airdrop, which began yesterday, was the latest example of a retroactive airdrop that was limited in certain ways — perhaps even more so than most. In a blog post, the DEX aggregator noted that it cut down the 1.3 million users of the protocol to just 20,000 eligible addresses.

The main thing Paraswap focused on was how often somebody used the aggregator. “We look at the time the user first interacted with ParaSwap, if and how frequently he came back and how savvy the swaps were,” the post said.

It also focused specifically on eliminating what it described as “airdrop hunters.” 

The team identified addresses that would transfer funds to a few wallets, perform some trades on Paraswap and then send the funds back to the parent address. These wallets likely hadn’t interacted with any other protocols either. By that logic, Paraswap made sure to exclude these wallets from its airdrop, along with any others that hadn’t used the aggregator at least five times in the last six months.

Inevitably, this partitioning excluded a lot of people that had used Paraswap, even since the beginning. 

Greg Shaheen, a senior project manager at 21Shares, said that he started using the protocol just four months after it launched. He made roughly 45-60 swaps on the platform leading up until the snapshot but didn’t qualify for the airdrop.

“I try not to be someone who complains when they don't get free money but in this particular case I was somewhat annoyed. I was quite patient with them and put in a lot of time & effort into the project in the hopes of one day of being rewarded,” he said.

Paraswap acknowledged that it was tough to try to find the right distribution. “Token distributions are tricky to get right, and only time will tell if our decisions were for the best,” the blog post added, before highlighting that the ENS distribution had paved the way for more targeted airdrops based on engagement.

What’s the best way to design an airdrop? That doesn’t seem clear yet. What is clear, though, is that the more airdrops there will be, the more people will try to game the system — and the more projects will be forced to apply deeper restrictions to those who get the tokens. 

It’s a vicious cycle and one that doesn’t have a clear solution.